FCX Stock: Analyst Delivers Reality Check to Freeport-McMoRan Inc

By Palwasha Saaim, B.Sc Published : March 4, 2016

Is FCX Stock Worth a Second Look?

Freeport-McMoRan Inc (NYSE:FCX) stock is probably one of the rarest trades that have delivered positive returns since the beginning of this year. However, analysts believe FCX stock’s future remains uncertain.

Analysts are divided on where the stock will move next. The company has seen some upgrades, but it’s mostly seeing downgrades. The worst was its recent rating downgrade by Standard & Poor’s to “junk” status.

On Thursday, UBS analyst Matt Murphy also delivered a warning on the company. Despite the stock picking up on upward momentum, Murphy has set a modest $9.00 price target for the stock.

The analyst sees two headwinds for FCX stock. The first is its heavy debt load, with Murphy saying the company is overly leveraged with unsecured debt. The second problem is low commodity prices that continue to hit the company’s revenue stream. (Source: “UBS Downgrades Freeport-McMoRan (FCX) to Neutral,” Street Insider, March 3, 2016.)

Recall that much of this year’s positive return in FCX stock was delivered in the last month. That’s when Freeport’s three major commodities—copper, gold, and oil—saw a surge in their prices.

If you look at FCX stock’s historical price trend, the stock has moved in tandem with oil prices. The same goes for copper and gold in relation to Freeport-McMoRan. So, it wouldn’t be wrong to say that the stock’s future is heavily reliant on the momentum and direction in commodity prices.

However, a hint of positivity in the analyst’s note makes me optimistic. The analyst mentions that the company has started off the year on a strong footing. Asset sales worth $1.0 billion have so far helped it unlock some value. If the company can maintain the trend and manage to achieve $3.0 billion worth of asset sales by the middle of 2016, it will be able to reduce its significant debt.

Likewise, the rout in commodity prices may have hurt the stock, but they are not expected to stay this low forever. It’s agreeable that a supply glut has taken these prices to recession-lows. But let’s not forget that the rout is continuing to force many small producers out of business. This will naturally take down output levels. Eventually, only the biggest in the industry will survive. It’s safe to assume that prices will ultimately find a way back up.

The Bottom Line on FCX Stock

Although the UBS analyst has raised some valid concerns, the fact of the matter is that FCX stock is currently trading close to its Great Recession lows. The environment is attractive for merger and acquisition (M&A) activity and Freeport-McMoRan has a fair chance at streamlining itself through more asset sales. Finally, the commodity price outlook is not too bleak, either.

All in all, FCX stock may surprise us by soon breaching Murphy’s price target.